New Brew;

TO WALK THROUGH THE IRISH TEAK doors into Sieben's River North brewery on a Friday night is to think that lightning has struck. It is still shakedown time, but after three months of business the joint is jammed.

The benches and picnic tables in the lower-level beer garden are full, and there is a 15-minute wait for restaurant seats on the platform level several steps above. The 900-gallon copper brew tanks -- the working heart and symbol of the concept -- are polished and gleaming. Beer aficionados, drawn by the chance to sample five different brews right at the source, sit cheek by jowl with trendies checking out what the Chicago Sun-Times has called the city's "most fun" new restaurant. Young single professionals in suits and ties wait with denim-clad couples from the suburbs -- and with a solitary grandfather in a fedora, a nostaligia buff who remembers the old Sieben's, Chicago's most famous beer garden, closed more than two decades ago.

After a 20-year hiatus, brewing has returned to the windy city and been welcomed with open arms. But Sieben's River North is more than a return to the past, regardless of the period advertisements that line the gray walls. It is more than a brewery, too, regardless of the storage cellars hidden downstairs, and it's more than a restaurant, regardless of the exposed beams, lacquered brick, and linen napkins above. Sieben's is a new phenomenon entirely, a "brewpub," a hybrid adaptation of microbrewing that combines manufacturing and retailing. With the brewpub, America's microbrewers have created a niche within a niche, "the most exciting area of brewing in America today," according to Charles Papazian, president of the 10-year-old Association of Brewers. Since 1983, when California became the first of the 23 states that now permit on-premises sales, 32 brewpubs have been built, 9 in the last year alone.

The business plan that spawned Sieben's River North had painted an optimistic picture. As principals of Chicago's first and only brewpub, the corporation's six stockholders would serve a metropolitan market of some 6 million adults. By creating a limited partnership, they expected to raise nearly $1 million in capital, opening virtually debt free. James Krejcie, 33, then president of the corporation and the operation's supposed future general manager, promised gross margins of 44%, $200,000 in pretax profits over the first 12 months of business, and $1.8 million in profits over five years.

The assumptions were wrong. Over the eight months of construction, the original $1-million price tag would double, adding a million dollars in debt. The menu, initially planned as a modest sampling of finger foods, would grow and the margins shrink. Shortly after its September 1987 opening, Sieben's had a competitor, with perhaps two more local brewpubs scheduled to open in 1988.

The income projections were wrong, too. The estimates prepared by the accounting firm of Blackman Kallick Bartelstein predicted the operation wouldn't become profitable until the fourth month. Instead, it was making money within its first 60 days.

When Jim Krejcie sat down to write his business plan in July 1986, he had already put four years into the project. He'd hoped originally to open a restaurant, a high-concept operation like those he'd worked in during his time under innovative Chicago restaurant king Richard Melman, of Lettuce Entertain You Enterprises. But Krejcie, the night manager and co-owner of a liquor store, had shifted his sights after stumbling onto the brewpub idea at a 1982 Colorado microbrewery conference. A brewpub was just another concept, he decided -- like a restaurant built around "a big soup kettle" -- but a good one.

He began putting together a general partnership and turned for brewing expertise to a fellow Chicagoan he had met just before the Colorado conference, Ron Siebel, who as president of J.E. Siebel Sons' Co. is heir to an illustrious brewing tradition. Since 1872 the family firm has served as research chemists and technical consultants to the brewing industry; since 1900 it has run a training school for brewers, the Siebel Institute, the only school of its kind in the western hemisphere; since the mid-1930s it has published the brewing industry's trade journal. Siebel had dreamed of adding a microbrewery to his interests for years but had always been discouraged by the numbers and scale involved, until he too became a brewpub convert. Eventually, his brother Bill Siebel, current president of Sieben Brewing Co., and Joe Pickett Jr., now vice-president, would join the venture as well.

All of them knew the relevant history. In five years, the number of microbreweries had grown from 7 to 76, including the 37 that opened last year alone. While total annual micro output remains less than Miller and Anheuser-Busch spill, micro beer sales have been rising as fast as 50% a year. Sales of the giant mass-market brands have stayed flat.

Few micros actually managed to turn a profit, though. It's not enough to brew great beer. You have to market and distribute it, and keep the quality high. With neither pasteurization nor added chemicals, micro-brewed beer demands refrigeration to hold its flavor. But few retailers or distributors are willing to bother with such special handling, or even to carry a microbrewery's products at all, given the tiny volume involved.

The brewpub is one alternative to regular retail channels. Rather than battle for limited space on distributors' trucks and store shelves, a brewpub need only get people through the front door, a marketing challenge far less daunting. Selling at the source keeps quality control in the hands of the manufacturer. With no kegging or bottling, line costs are low, while the brewer captures the retailer's, the distributor's, and the manufacturer's profit.

The potential margins are heady indeed. At an average price of $2.15 a glass, gross manufacturing margins can exceed 97%.

By the time all the general partners gathered, Krejcie's efforts had provided the project a long head start. Beginning with $10,000 borrowed from his mother, he had assembled most of the key assets, including the brewing equipment, the location, and the Sieben name. Sieben had been closed for 20 years; reviving its logo tied Krejcie to Chicago's oldest beer garden, and to a colorful past that included Prohibition raids and gangster shootouts.

The location, 20,000 square feet in an old factory on West Ontario Street, initially seemed a gamble. Although the street had been dubbed Entertainment Alley by the local media, the site was on the fringe, blocks away from the existing nightspots of River North, the latest Chicago neighborhood to be rehabbed and gentrified. By the time Krejcie signed the lease, however, River North had grown hotter still, adding operations like Hard Rock Cafe and Ed Debevic's, sending the galleries and shops all the way down to the Sieben's site. Area real estate was running at between $15 to $25 a square foot by the time Krejcie signed the lease, but he made the owner of the building the sixth shareholder, then negotiated a seven-year rate of $4 per square foot, plus $3 per barrel produced, and 3% of food sales after $400,000.

Krejcie started circulating his prospectus in August 1986, and by the end of November had raised $800,000 from 35 limited partners. It wasn't the terms that most attracted investors, Krejcie recalls, as much as his enthusiasm for the romance of the project -- and perks that included $100 of noncumulative credit each month for free food and beer.

Krejcie found spending money even easier than raising it. Final construction costs ran $1.75 million -- $87.50 a square foot. Added to the soft costs of $250,000, preopening costs were double what the partners had planned.

"If I had sat down with the six general partners and said it would cost $2 million, not one of them would have stayed in the project," Krejcie admits. "But I figured once we had a million, it would be easy to get the rest."

Krejcie was right. Sieben's preopening debt included $550,000 in leased restaurant and brewery equipment, with a five-year payback at between 13% to 15% interest, and $500,000 of bank debt at 1/2% to 1% over prime.

For Ron and Bill Siebel, the beer was the key: two ales, a lager, a stout, and an occasional special, each different in style and design. It took five months at Siebel Institute to formulate and test the products. Out of the institute at the same time came Sieben's brew master, Peter Burrell, a 30-year-old geologist-turned-brewer chosen from among the students.

In April 1987, Krejcie, enmeshed in the construction project, hired Laurel Hanson to steer the operation ot its scheduled September opening. Hanson had just launched a consulting career after five years with the Levy Organization, a Chicago-based operation with more than 20 restaurants. She had been director of training, then project coordinator for start-ups, and in the latter position she had opened some 18 different operations, including a 387-seat house. When Hanson spoke, the partners listened.

Hanson was skeptical of Sieben's menu plans -- "too beer-hall oriented," she said, "just a few sandwiches and pretzels and mustard." She decided she would keep the original ham, liverwurst, and salami sandwiches that had been the hallmark of the old Sieben's. But then she expanded the menu from those three items to a three-page extravaganza ranging from chili dogs to roasted marinated breast of chicken, with four salads, three soups, six appetizers, and five desserts. "More than a meal," she labeled it, "good Midwest American food." She'd stress quality and value: bratwurst from specialty markets, a restaurant exclusive on the city's best corned beef, and call brands in the liquor well.

Hanson admits "the idea of the change made the partners nervous and scared," particularly since her new menu would demand a $255,000 kitchen, not the basic $55,000 one planned for in the budget. But consider our target customer, she argued: men and women between 25 and 45, earning in the $25,000-to-$55,000 range. They eat out regularly, and demand a broad range of choices. Beer would remain the main profit generator, she agreed, but a broader menu would mean vastly increased volume, even if it pushed food costs up.

Hanson set her prices after conducting three different price/ration feasibility studies, looking first at other operations in River North, then at other high-value restaurants in Chicago, and finally at other brewpubs across the country. She charged less than her neighbors -- $4.95 for a chef salad, $12.95 for a sirloin strip steak or the Saturday-night rib special -- accepting higher food costs and lower margins. "We sell more beer doing that," she insisted. With the final menu, food sales are expected to generate 45% of total revenue -- at 36% cost of goods sold.

Sieben's counted on a public-relations splash to announce the launch. While the partners spent $6,000 for advertising in the local newspapers, most of their marketing money went for promotion. An outside agency flooded the press with stories about the return of the brewer's art and tradition to the city of big shoulders, winning free coverage on all the local TV and radio stations and most of the newspapers in town. Before the opening, the streets were flooded with 30,000 copies of the new menu, printed inside a newspaper headlined "Sieben's Saga Spans Centuries" and "The Tradition Continues."

No sooner had it held its grand opening than Sieben's was "discovered." The Chicago Sun-Times reported "the herd has been marching to Sieben's in droves." And within two months the place was operating at a profit, with a Saturday-night wait that stretched up to two hours. While area critics panned the food (see "The Beer's Great, But . . ." page 88), the room's 398 seats were turning one and a half times at lunch and three to three and a half times at dinner, with the average check per person running $7 at lunch and $18 at dinner.

On November 1, with construction still unfinished, the general partners asked Jim Krejcie to resign as the president of Sieben's. By late November, the operation was grossing $270,000 for a four-week period, more than double the $120,000 that the business plan had projected. On January 1, Laurel Hanson was named general manager, with a limited partner's share.

Its preopening public-relations campaign gave Sieben's a huge push. But the "herd," commentators say, inevitably will move on, discovering the next hot spot. Then the concept will be tested by the staff's ability to execute.

Jim Krejcie, now general partner without portfolio, is critical of the direction the operation has taken. "This is a restaurant business, not manufacturing," he insists. "We should be taking 25% to the bottom line [aftertax income], but our food costs are extremely high because of the cost of the menu and because nobody is watching the buying. I'd like to chop the menu in half; I'd rather be known for the greatest hamburger in town than try to be everything to everybody. The other partners are already talking about the next project, or franchising, but we don't know what we're doing here yet."

While Hanson acknowledges that her food costs are too high, she stands behind the menu, expecting to be able to hit 36% once the inevitable jitters and loose ends of the opening are worked out. "We can be very high achievers once we have our controllable expenses down," she predicts. "I'm aiming for a pretax profit of from $45,000 to $60,000 on $270,000 of sales each four weeks -- if we did that I would smile all the time."

It will take staff training to make her smile, Hanson says. A few prices may be raised and a few portions shaved, but she expects to improve the numbers primarily by putting tighter controls in the kitchen and educating the entire staff in the art of portion control. She expects staffing levels, down to 130 from the opening 180, to drop a bit more, and hopes to develop a compensation system for management based on performance. Hanson herself earns a percentage of gross margins on top of her salary.

With the PR bonanza played out, Sieben's marketing will shift to a more basic strategy. Its outside agency has been released, and the budget has been cut to 4% of sales, to be spent advertising in the weekend sections of the local papers. Hanson has named an assistant to help create regular table tents announcing promotions on special brews and to develop brochures inviting tour groups to visit.

Ron Siebel, who remains president of his family's business while brother Bill heads up Sieben's River North, admits to being surprised by how different the finished brewery is from what he'd expected. "I'd envisioned a basic Sieben's -- and worried about how to fill it. But we kept expanding, almost by accident, the more we talked to restaurant people. Now, we have two complex businesses here, a brewery and a restaurant, and on a day-to-day basis we have to run it as a restaurant so we can charge for the beer."

It is the beer, Siebel insists, that will keep Sieben's at the top of a market that could soon have four brewpubs. "You're going to find the imitators out there," he says," but the public is going to be able to tell the difference." Sieben's beer will be available only on site, although Siebel has already gotten calls from restaurants that want to serve his product. In the future he may offer limited amounts of draft beer packaged for take-out.

When Ron Siebel thinks of the future, however, he primarily thinks of expansion. After 116 years serving other brewers, J. E. Siebel Sons' has a son in the brewery business himself, and Sieben's River North is just a start. "We won't do another brewpub here in Chicago," he says, "but as a group we'll look to other markets. I'm not sure yet how that should work -- the brewpub concept is valid, but it has to be tied to local people. I doubt you'll see a franchise, but that could be possible, too."

EXECUTIVE SUMMARY

* THE COMPANY: Sieben's River North Brewery Inc., Chicago

* CONCEPT: Combination microbrewery/restaurant; beer, with 97% gross margins, to be more than half of total sales

* PROJECTIONS: Sales in second fiscal year of $3.7 million, with pretax profits of $590,000 (16%). Considering expansion to other cities